The pros and cons of investing in property funds

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Property fundsIf you have an investment portfolio you should be looking at investing a portion of your funds into property but what is the best way to gain exposure, how can you ensure that you don’t over expose yourself to one area at the expense of another?

While the options open to you will depend upon the size of your portfolio, there are very few investors who can gain sufficient exposure via individual properties or even part investments into a number of property projects to ensure you track the markets. The name of the game is to use your funds available to give a good spread of any sector so that you benefit from the overall movement in markets, not the movement in any specific property which could do better or worse than the average.

 

In basic terms you need to look at the array of property funds available today and use these to give yourself ‘general’ exposure to the markets.

Types of fund available

There are many different types of property fund available which include :-

General funds

This is the safest option on the market and will traditionally give you some form of exposure to many areas of the world, many different property sectors and a mixture of those with potential for capital growth and those that offer a good rental income. These funds are unlikely to be volatile and will follow the general worldwide property trend, assuming the fund mangers get the asset mix correct, taking in traditional property markets and emerging markets alike.

Income funds

Property income funds are likely to consist of exposure to older properties which offer limited capital growth but a very attractive income which is then used by the fund to either make dividend payments to investors or possibly reinvested and new fund units issued to investors. While this type of fund can be seen by many as boring, and will not benefit as much as general funds when property prices move higher, they should not fall as much in the bad times because of their income backbone.

Capital appreciation funds

For those looking for something a little more exciting there are property funds which will investment in properties which offer more scope for capital appreciation than income. They will be a little more risky, invest in new ventures and also offer exposure to emerging markets with potential for capital appreciation. While you would be foolish to invest a larger amount of your investment portfolio into these higher risk funds, they could offer an interesting alternative investment for a small percentage of your overall investment portfolio.

In addition to the main headline funds mentioned above there are literally hundreds of niche specialist funds available which offer exposure to retail property, commercial property, new ventures, any country or area in the world and any other property asset class you care to think of. While on their own they may look a little risky, as part of a general investment strategy (and assuming you have sufficient funds to make it worthwhile) they can offer interesting potential for the future.

So what are the pros and cons of investing in property funds?

Pros

Many of these funds are worth in excess of hundred of millions of pounds and may offer a spread of investments which covers literally hundreds of different properties. Using this large scale exposure to the market you are unlikely to see performance vary much above or below the benchmark and volatility should be kept to a minimum. The traditional investor would not be able to get individual exposure to anywhere near the same number of properties.

One issue which we are seeing now is the fact that literally millions of properties around the world are struggling to attract buyers leaving owners with large mortgage payments and homes which many cannot afford to keep. By using property funds as your route to exposure to the sector there will be a liquid market in the fund units as and when you need to sell. This increased liquidity takes away the pressure, time and cost of selling individual properties as the fund managers would just net off buyers and sellers or use cash reserves to buy back units.

Cons

While there are very few downsides to investing in property funds as oppose to individual properties you are at the mercy of the underlying fund managers and their skill in picking the best properties at the right time. If they get it wrong your investment will suffer but then again there are so many different ones to choose from and so many performance figures available you should be able to choose the better performers on an historic basis (although past performance is no guarantee of future performance).

While there are obvious risks to investing in one or a small number of properties directly, there is the potential for greater upside if you get it right. For example you may pick the right property market at the right time and see an increase of 20% in your property where as the average appreciation across the whole property sector may just be 10%. You take a higher risk for a potential higher return which can work out for you if you do your homework – but there may be greater downside if you get it wrong.

As we mentioned above, if you have a property in today’s market there is a chance that you would struggle to find a buyer and even if you could the price might not be the ‘market’ value at the time. In the good times there are often more buyers than sellers but this can change very quickly and if you need to sell for financial reasons it can leave you in a real mess.

Conclusion

While property funds might not appeal to everyone they do offer a more structured and less risky exposure to the property market. They may not set the world alight with returns, but they offer a liquid market if you need to sell your units in the fund, they are managed by companies with access to more information than the general public and there are so many available for different markets, types of return, etc that there will be something for everyone.

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